Tax on Salary Income, TDS on Salary with examples

Any income received by an employee is chargeable under head “Income from Salaries” and tax on salary is levied in the manner as shown below. Income would be taxable under head Income from Salaries only when an employer-employee relationship exists.

The following computation of Tax on Salary Income and TDS on Salary is required to be shown by a salaried taxpayer at the time of filing his Income Tax Return.

TDS on Salary

At the time of payment of salary by the employer to the employee, the employer is also required to mandatorily deduct TDS on Salary under Section 192 and the balance amount after deduction of TDS is payable to the employee. The TDS on Salary is required to be deducted on the basis of average rate of income tax of the taxpayer for that financial year.

The average rate of income tax is to be calculated on the basis of income tax slab rates in force for that financial year. The average rate of income tax can be calculated with the help of an example:-

For eg: Mr. M is earning Rs. 70,000 per month. Therefore total estimated income of Mr. M during the financial year 2013-14 would be Rs. 8,40,000. He has also claimed deductions of Rs. 1,00,000. Therefore, his income chargeable to tax after deductions is Rs. 7,40,000. Total Tax on Salary payable for the year computed as per the slab rates would come out to Rs. 78,000 + Cess @ 3% i.e Rs. 2340. Therefore tax on salary payable is Rs. 80340

Therefore average rate of Tax on Salary =

Total Tax Payable = 80340 * 100Total Income = 840000

= 9.56%

Therefore, in the case of Mr. M, the average rate of tax would be 9.56% as explained above. TDS on Salary would be deducted @ 9.56%. Therefore TDS on Salary would be 9.56% of Rs. 70,000 i.e. Rs. 6695 would be deducted every month as TDS on Salary.

Average rate of Tax in case of each Individual is different for each financial year and keeps varying based on the estimated income of the taxpayer and the Income Tax Slab Rates in force for that assessment year.

The tax deducted as TDS on Salary is reflected in the Form 16 which is issued to the taxpayer at the end of the financial year. The taxpayer can also check the details of the TDS deducted and deposited by his employer by verifying these details through the Form 26AS which can be checked online.

In case the employee is not liable to pay any income tax as his income is below the taxable limits, No TDS would be deducted from his income.

TDS on Salary from more than 1 employer

In case an employee changes his job and joins a new organisation, he may furnish to the new employer – a statement in Form 12b stating the salary received from the previous employer and the TDS deducted thereon.

Based on the information furnished by the employer in Form 12b, the new employer will deduct TDS accordingly keeping in the mind the TDS on salary deducted earlier.

Deposit of TDS on Salary with the Govt.

Tax on Salary deducted by the employer does not go in the pockets of the employer as he is required to deposit the TDS on Salary deducted with the Govt before the prescribed due date. At the time of making the payment of TDS with the Govt, the employer is also required to mention his TAN No. on the deposit challan.

At the time of deposit of TDS on salary, the employer specifically mentions the salary paid to each employee and the tax deducted thereon. He is also mandatorily required to quote the PAN No. of each employee while depositing the tds with the govt. If the employer fails to deduct and/or pay the TDS on Salary on time – interest & penalty would be levied on the employer

Revision in deduction of TDS on Salary

In case an employer has deducted a lower amount as TDS on Salary in the initial few months as compared to what he was required to deduct, he can compensate the same by deducting a higher amount in remaining months and vice-versa.

However, the total TDS on Salary deducted during the year should be equal to the tax on salary payable by the employee as per his Slab Rates.

In case there is excess deduction of TDS on Salary than what was required to be deducted, a taxpayer can claim income tax refund of excess tax paid.